Yield figures help to assess buy-to-let profit

Property investors use a simple calculation to determine the ‘gross yield’ of a property. This figure is the annual rent divided by the cost of the property as a percentage.

For example: a rental unit worth £200,000 fetches £800 in rent per calendar month. The average annual rent (£9,600) divided by £200,000 is 0.048. Thus, the gross yield is 4.8%.

Gross yield is useful for making quick comparisons between properties based on their market value and rent. But it does not help determine how profitable an investment is. For this, ‘net yield’ is more appropriate, as it takes into account the running costs detailed below.

Gas safety checks. Gas appliances in a rental property must, by law, be safe to use. A Gas Safe registered engineer must check every appliance, flue and pipe once per year and issue a record of each check.

Landlord insurance. Tenants are responsible for insuring their own belongings. But landlords are responsible for insuring both the building and the contents that come with it, such as carpets, flooring, curtains, white goods and any furniture provided. If the property is leasehold, the freeholder may already have buildings insurance in place.

Mortgage repayments. Finance repayments are often a landlord’s biggest expenditure. Many landlords switch their mortgage every few years to ensure that they are getting the best deal. Enquire about your next buy-to-let mortgage.

Repairs and replacements. Minor repairs are unavoidable, as is the need to replace fixtures and furniture. Landlords should set aside some of their rental income for refurbishment and upkeep.

Other occupied costs include:

Accountant fees. Many landlords like to use an accountant. They keep accurate financial records, take care of tax affairs and can help with tax planning.

Council tax. Council tax is normally a tenant’s responsibility to pay. But under some circumstances, landlords must pay council tax for an occupied property.

Electrical safety inspections. Periodic inspections are legally required for houses in multiple occupation (HMOs). But all landlords must ensure that the electrical installations in their properties remain in a safe condition. Experts recommend hiring a registered electrician to conduct a check every five years.

Ground rent and service charges. Ground rent and service charges may apply for a leasehold property.

Letting agent fees. Some landlords use letting agents to find tenants or manage their property (or both). Agents usually charge a percentage of rental income for full management, and often charge one-off fees too.

Rent guarantee insurance (RGI). RGI is not mandatory, but can help landlords recoup losses if their tenant defaults on their rent.

Other expenses. Small but unavoidable business expenses will always crop up. Key-cutting, postage, telephone calls and travel are just a few examples.

Unoccupied costs occur when the property is not tenanted

Expenses incurred during ‘void’ periods include:

advertising;

cleaning the property before and after a tenancy;

council tax;

decoration;

gardening, if applicable;

referencing prospective new tenants; and

utilities

Many buy-to-let running costs are proportional to the size and value of the property. A healthy rental income should thus be adequate to cover day-to-day expenses. But not all costs are planned, and it is always wise to have a contingency fund in place.